When to worry about competitors and when to ignore them
We are profoundly attracted by the drama of competition. Our tendency to compare ourselves with others and our desire to prevail over them are deeply inclined in human nature. But making business strategy about the competition does mostly not produce the best results. Competitor orientation creates huge opportunity costs and can severely hurt performance.
Individual competitors matter in concentrated markets
Competing with individual rivals makes sense in zero-sum situations where one player's gain is another player's loss. In these cases you have to beat your competitors if you want to succeed. Sport and war are important examples. In business, zero-sum competition can occur in concentrated markets where the set of relevant competitors is limited to just a few players.
The defining characteristic of concentrated markets is interdependence. Competition is strategic as players can’t act in isolation. They have to consider the strategies of their rivals to determine their own best course of action. Game theory is an important tool for navigating the challenge of interdependent decision-making and helps to decide when to cooperate and when to compete. Deeply understanding the limited set of competitors and managing competitive interactions with them are thus key concerns in concentrated markets.
In contrast, in fragmented markets any considerations of strategic interdependence with particular rivals can be neglected. Decisions can be made in isolation and their success is mostly a question of effective implementation. Individual competitors should be ignored as there are too many to deal with or even to worry about. The competition should be seen as a performance benchmark that allows to assess the success of a firm by seeing how well it does relatively to other players in the market.
Good strategy puts customers first
Aside from zero-sum situations, strategy should not primarily be about "coping with competition" as Michael Porter once famously claimed. In business, the main source of opportunity and the starting point of any good strategy is the customer. Dealing with competitors is a second-order problem that comes after the central concern of creating value for customers. The key point is that customer value creation is Pareto-efficient. You can make yourself better off without making any of your rivals worse off.
The problem with focusing strategy on competitors is that it incurs substantial opportunity costs. Competitor orientation diverts attention and resources away from customers. And fighting competitors tends to happen in ways that destroy rather than enhance customer value. Competing on price, for example, will eventually leave everyone in a particular market worse off.
The truth is that most business situations are not zero-sum. Outside of concentrated markets strategy has to be about creating customer value, not about dealing with competitors.
I would be interested in your view. How much attention should you pay to competitors? Please share your thoughts in the comments.
References
- The discussion of the role of competition in concentrated and fragmented markets draws on ideas from Bruce Greenwald and Judd Kahn put forward in their book “Competition Demystified – A Radically Simplified Approach to Business Strategy“ (Portfolio, 2005).
- Michael Porter started his seminal article "How Competitive Forces Shape Strategy" (Harvard Business Review 57, No. 2, March-April 1979, pp. 137-145) with the sentence: "The essence of strategy formulation is coping with competition."